Dollar up vs. euro, down against others after jobs

Worries about Italy keep the euro lower

By

DeborahLevine

LisaTwaronite

NEW YORK (MarketWatch) — The dollar turned back up against the euro but stayed lower against other major currencies on Friday after President Barack Obama, following a weak U.S. payrolls report for June, said the U.S. economy has a long way to go before fully recovering.

Still, the euro remained weak as political turmoil surrounding Italy’s finance minister sent that country’s bond yields up sharply, raising worries about Italy getting sucked into Europe’s debt crisis.

“It’s difficult to want to invest in anything, especially with Europe, Japan and China, and then confidence in the States was shot again this morning,” said Dean Popplewell, chief currency strategist at Oanda Corp.

The dollar index
DXY, -0.09%
which measures the U.S. unit’s value against a basket of six major currencies, traded at 75.179, down from 75.330 prior to the jobs report but up from 74.938 late Thursday.

Against the Japanese yen, the dollar
USDJPY, -0.22%
fell to ¥80.65 from ¥81.23 late Thursday. The yen is more sensitive to changes in U.S interest rates, which turned sharply lower after the report. Lower rates make foreign investors less inclined to convert their currencies into dollars to buy U.S debt. Read story on falling U.S. bond yields.

The greenback also turned lower against the British pound,
GBPUSD, +0.2331%
which rose to buy $1.6037 from $1.5968 Thursday..

The Australian dollar
AUDUSD, +0.1522%
slipped to $1.0748 from $1.0773 late Thursday, following commodities and equities, which fell markedly.

‘Waiting for a magic bullet’

The dollar wavered then slowly gave up some gains after the U.S. Labor Department said the economy added 18,000 jobs in June, fewer than analysts expected and an unexpected decline from May, which was also revised lower. Read about nonfarm payrolls.

“Not even the most pessimistic economist on Wall Street expected such a weak print, which explains why we have seen such a violent reaction in the dollar,” said Kathy Lien, director of global research and analysis at GFT. “Europe has its own problems, but the pace of the U.S. recovery has fallen far short of everyone’s expectations.”

In a brief appearance before reporters Friday morning, Obama also cited uncertainty about European debt and “real differences” among U.S. lawmakers about the country’s debt ceiling. He suggested trade deals and infrastructure spending as possible ways to help boost growth and hiring.

A handful of economists and analysts again raised the possibility of the Federal Reserve embarking on another round of stimulus. The central bank is still considered unlikely to engage in a third round of bond buying, or quantitative easing, so soon after finishing the second round last week. Read blog on potential for QE3.

“Markets are telling you [that] all this government and Fed stimulus has done very little to the job environment,” Popplewell said. “Realistically, we have to hope and wait for the existing stimulus to go through the system and for some expansion to occur. We’re waiting for a magic bullet.”

Also weighing on the euro were rising worries about Italy’s debt following conflicts between Finance Minister Giulio Tremonti and Silvio Berlusconi’s conservative government. The cost to insure Italy’s debt and the amount of yields investors demanded to hold Italian debt above benchmark German bunds widened markedly. Read more about Italy, bond yields.

Italy is Europe’s fourth largest economy, just behind Spain, which has also come under pressure as one of the peripheral countries where investors are worried about their ability to shoulder their debt burdens.

“Italy is a problem and spreads widened the most in recent history this week,” said Jens Nordvig, a currency strategist at Nomura Securities. “While a bailout was economically manageable for Greece, Ireland and Portugal, this is not the case for Italy. Turmoil will be much more complicated to deal with in the bigger euro zone markets, hence we need to pay attention.”

Japan reports

Japanese government data released earlier Friday showed the country’s current-account surplus for May was sharply down from the year-earlier month due to the impact of the March disaster, but still came in better than economists had expected.

For the week, the dollar index is up 1.1%. The euro has declined 1.9% since last Friday, it’s worst week since mid-May. China made news by unexpectedly raising interest rates to slow its growth and inflation.

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